Equity crowdfunding secondary market race hots up

Last year, one of the UK’s largest equity crowdfunding platforms, Crowdcube, announced their plan to ‘pioneer secondary liquidity for investors’[1], and true to their word completed their first on-platform secondary share trade last month.[2] Less than a year later, their largest rival, Seedrs, have announced similar plans. [3]

Until now, investors in businesses raising funds on equity crowdfunding platforms have been stuck with their investment until there is some form of exit. In an industry where the number of successful exits remains disproportionately low, could this be an attractive shake-up to the equity crowdfunding sector for investors?

What is a Secondary Market?

A secondary market is a financial market where investors can buy or sell securities. In terms of the equity crowdfunding sector, a secondary market refers to a marketplace where investors can sell or buy shares to and from other investors in privately held businesses that have previously equity crowdfunded.

What Does This Mean for Investors?

The fact that equity crowdfunding investments are highly illiquid has always been a large risk factor for the industry. From the offset, investors are made aware that the shares they get in return for their investment are unable to be traded. Therefore, their return is dependent on a successful exit, such as an IPO or takeover.

With the introduction of an equity crowdfunding secondary market, Seedrs & Crowdcube are opening up the space to investors perhaps previously reluctant of investing due to the fear of locking their money away with no easy way to sell their investment. Many industry commentators see the introduction of a successful secondary market as the silver bullet that could take the industry on to the next level.

However, these early versions of an equity crowdfunding secondary market are just that and it will be some time before we see a high volume of trades being made on the markets . So, what are some of the limitations of the secondary market proposals as they stand?

Short Term Limitations to Overcome

The markets will only be able to list businesses that have previously crowdfunded on the host platform.

Only existing investors will be able to buy shares on the market (i.e. investors can only increase their share in a company from other investors that wish to sell).

Valuations of the business will be set by the platform rather than by the market.

Not all companies will be eligible to sell shares on the secondary markets as certain qualifying criteria will need to be met.

Investors must also take the responsibility upon themselves to become informed on the markets and minimise the risk of being potentially denied a fair price for their holdings. This secondary market will not operate freely, and whilst guidelines are being followed, ultimately it has fallen with the individual platforms to set a ‘fair value’ price. This could present a transparency issue, particularly for those less well-informed in the event that these guidelines are not properly observed.

In spite of these early limitations both platforms are very open that this will be a learning curve[4] for them and this testing phase will provide some greater clarity on the potential of secondary markets. This is the first step on a long journey to opening up liquidity in the early stage equities market and both platforms should be commended for taking this step.

The long term goal of a highly effective equity crowdfunding secondary market for an investor will be one where they can trade the shares of any business that has crowdfunded, regardless of which platform they initially raised on. This would give investors the choice and control for them to be truly empowered in the sector. Taking this one stage further would be an open market for shares in any privately owned company, whether they have raised via crowdfunding or not. This may not be achievable for many reasons; both regulatory and practically but it could really change the market.

About the author

Lily Bridgwood

Lily is the Partnerships Associate at OFF3R. She has previous work experience in both the corporate and start-up environments. She joined the OFF3R team in October having recently graduated with First-Class Honours in International Business from the University of Edinburgh.

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